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UK car finance debt soars to £40bn

Finance debt for new and used cars has risen to £40 billion per year, prompting concerns that consumers may default on agreements amid soaring living costs.

Analysis by The Car Expert shows that UK car finance debt has increased by £29bn since 2009.

Almost all (circa 92%) new cars are purchased using finance agreements, along with a growing number of used cars, meaning hundreds of thousands of owners could be at risk of defaulting on their debts.

The Car Expert found that the average amount financed per new car has more than doubled, increasing from just under £12,000 at the start of 2009 to more than £25,000 by the end of June 2022.

Similarly, the average amount financed per used car has also risen significantly, escalating from slightly under £9,000 to over £15,500, exceeding inflation rates over the same period.

While borrowing on new cars has swelled to £17.5 billion in the last 12 months, the used car market represents an even larger proportion of the UK vehicle finance debt burden, adding a further £22.2 billion of new borrowing in the last 12 months.

Used car prices are currently strong, but The Car Expert warns a likely weakening over the next year could leave borrowers with a significant negative equity problem if they are no longer able to afford their finance payments.

“Over the last decade, average wages have not kept pace with the growing level of debt. Whereas wages have only increased by 33% since 2009, used car finance debt has increased by 87% while debt borrowed on new cars has more than doubled,” said Stuart Masson, editorial director at The Car Expert.

“If the UK continues to experience spiralling inflation, we may have to brace for a significant proportion of borrowers defaulting, leading to their vehicles being repossessed and possible bankruptcy.”

He added: “Compounding the problem, energy costs are soaring, which reduces the incentive for car buyers to switch to electric cars. This means even greater costs for consumers trying to go green as the promise of significant lower running costs has not materialised.”

What Car? surveyed 1,060 in-market buyers and found, of those buying via finance, a quarter (25.8%) said the cost-of-living crisis had influenced their decision to borrow – helping spread out the cost of purchase – while 74.2% were always expecting to buy via finance.

Personal Contract Purchase (PCP) and Hire Purchase (HP) plans are most popular among finance buyers, accounting for nearly two-thirds (63.4%) of those buying via finance, while a quarter were undecided. PCP and bank loans accounted for 9.5% of planned purchases.

Motor finance providers are likely to tighten the criteria on which they base their lending, in order to minimise their risks during the cost-of-living crisis.

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